What can we invest in?

HOSTS Alec Renehan & Bryce Leske|17 December, 2019

Meet your hosts

  • Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

The beauty of investing is the world of choice that is available to you. Technology has broken down barriers and it has never been easier to access all of the opportunity that is out there. From Australian property to Asian stocks, European bonds to American currency, we can now buy all of these online. With so much opportunity at our fingertips the hardest part is knowing where to start.

So in this episode we break down some of the key assets that you can invest in (and one that you shouldn’t!).

In this episode you will learn:

  • The definition of an asset and the two functions it plays
  • The three most common assets – money, stocks and bonds
  • What role money (or cash) plays in your investing portfolio
  • The definition of inflation and the risk it plays into your portfolio
  • Why stashing cash under your mattress isn’t a good investment
  • An introduction to the difference between stocks and bonds
  • The meaning, and importance of, diversification
  • How you can buy other types of assets on the share market
  • How you actually make money from these assets
  • What a dividend is and how you get it as an investor
  • Why stocks are the preferred asset class at Equity Mates

Want more? Subscribe to other Equity Mates Media shows, social media channels, Thought Starters mailing list and more here

Bryce: [00:00:36] Welcome to get started. Investing a series of lessons to help you on your investing journey. This is for anyone who wants to start investing but really is unsure where to start. Our aim is to break down the markets and help them be as accessible to you as possible. Ms. Bryce and as always, I'm joined by my co-host, an equity body, Ren. How's it going, Ro? It's very good, Bryce. [00:00:59][23.7]

Alec: [00:01:00] Excited for Episode four as we delve deeper and deeper into the world of investing. [00:01:04][4.5]

Bryce: [00:01:05] Yes. Yeah, we keep on getting deeper. We're getting into the nitty gritty by now. We've addressed some of the main strategies that there are out there in the world of investing some of the main tips and tricks that you can deploy to save for investing. We've shared some of our stories and some of our mistakes. And so now Ren, it's all about discussing what can we actually invest in? Because the beauty of the stock market Ren is that it doesn't necessarily always have to be stocks that you invest in in terms of companies, direct companies. The stock market allows you to invest in all sorts of different assets. So you're not limited to buying just companies. But understanding those assets is what is important. And that is what this episode is all about Ren. So we're going to look at the three major financial assets being money, stocks and bonds, and then you might kind of finish off with commodities and property. But crypto crypto we can discuss. Yeah. Even though they're not in your portfolio for good reason. So, yeah, I mean, today is all about money, stocks and bonds, three major financial assets that are all accessible via the stock market. [00:02:10][64.9]

Alec: [00:02:10] Yes. Now, we touched on stocks in the last episode. So we'll build on that and we'll talk about how they compare to the other assets as well. Yeah. [00:02:20][9.9]

Bryce: [00:02:21] So let's start with probably the most common form of asset, I guess. [00:02:26][5.1]

Bryce: [00:02:27] I don't know. Would you agree that money being is the most common form of asset out there at the moment? I think so, yeah. Yeah, yeah. So I mean, money, you know, it's probably not the best environment at the moment. Cash as an asset. Interest rates are low. Rates at the bank are low. It is cheap to borrow money. [00:02:43][16.7]

Bryce: [00:02:44] But you might be hearing that, you know, having money in the bank is probably not the best option. However, it is a proportion of your portfolio that you need to consider. How much of your portfolio at the moment Ren do you have sitting in cash? [00:02:56][12.6]

Alec: [00:02:58] Including my savings, not including some, not including savings, maybe like 10 percent. Right. So you're pretty heavily invested in the stock market? No, because I'm invested in some alternatives as well. Nice. So I might get to that later on. Yeah, okay. [00:03:14][16.3]

Bryce: [00:03:15] So I'm a bit different. I probably have about 40 per cent of my total portfolio sitting in cash at the moment. For reasons that we will discuss a bit later on. But it is a proportion of your portfolio that you need to consider in terms of your total makeup. If you're 100 per cent invested into the stock market, then it means that you're going to have obviously no money to use at a later point to buy into stocks. So if the market does turn and you want to take advantage of it, but asset number one is money. Now, how does money appreciate over time Ren does it? [00:03:44][29.0]

Alec: [00:03:44] It can in certain circumstances, but in most cases it doesn't. And that's where inflation comes into play. Yeah, most simple way to explain it. Inflation happens as prices go up over time. And what it means is that every dollar you have can afford less. So, you know, your coffee goes from three dollars to four dollars. The dollar that you have to spend on it gets you less coffee. Yeah. Yeah. [00:04:11][26.5]

Bryce: [00:04:11] So then is money something that you consider to be an investment? Do you. Do you invest in in cash at all to get to the theory of money? [00:04:20][8.7]

Alec: [00:04:20] There's two things that any money or asset needs to have or could be. So any asset can be used to as either a store of value or a medium of exchange. Your store of value is essentially you own this because it is worth something and it will continue to be worth something and hopefully worth more in the future. And then a medium of exchange is you use it to transact in the economy and a lot of assets have some characteristics of both. So, for example, you could say gold is obviously used as a store of value and then not so much now, but at least the back through history. Gold was also used as a medium of exchange. It was used in exchange for other goods and services. Cash, not a great store of value. You're not holding cash because you think it will be worth more in the future. Or you think it will even hold value over time. You're really holding cash because you need it to transact in the economy. So I think as an investment. It's no good. But, you know, to what you're doing, you're holding cash at the moment because you want to exchange it for other assets. So when those assets are cheaper. Yeah. So even though you're using it as a medium of exchange. Yeah. But it's just, you know, cashes cash is easy. [00:05:34][73.6]

Bryce: [00:05:35] Now there are ways to invest in currencies I guess. And without going into too much of the detail, you can invest in currencies around exchange rates, say, for example, if you were to invest in the US dollar. If you think it's going to appreciate against the Australian dollar, then there are a number of ETF exchange traded funds out there that give you access to currencies in exchange rates. So we will touch on that when we talk about index an ETF. A bit later on. But if you were interested in actually investing in money in that asset, then there are ways to do it. [00:06:09][33.9]

Alec: [00:06:09] I think the most important thing to understand about cash, just in a general sense, is if you're putting cash under your mattress or if you're just storing cash in your bank, chances are you not only are not making money with that cash, you're probably losing money over the long term. So cash as an investment shouldn't really be considered. And the reason that you're losing money was inflation, which we touched on before. So if it's just sitting under your mattress for 20 years, it's going to be worth less in terms of what you can exchange it for in the market. So cash is obviously important to Brice's point. If you think another country's currency is going to do better against your own, you could turn it into that currency. But again, it would be better to turn it into, you know, stocks in that currency or bonds in that currency rather than just keeping it in cash in that currency. So we'll get to that in a second. But as an investment. Don't stick cash under your mattress. It's not the are the long term as an answer you're looking for. [00:07:07][58.3]

Bryce: [00:07:08] So Ren that then begs the question, well, if money over the long period of time is probably going to perform poorly and what I can buy now is going to be worth less in the future, it means. Well, hang on. I need to invest in things that are going to give me a better return than if I was to sit in the cash in the bank account. Right. Do I assume correctly you do. Awesome. So that means it's probably time to talk about stocks and bonds, because these are both asset classes that can give a better return. That is above the inflation rate and perhaps a better return than what you're going to be getting in your bank. And so you'll be transferring that cash into another form of asset. And these two assets, to your point, Ren, are more about store of value than exchanging for goods and services or a medium of exchange. Right. So let's start with stocks. We know what stocks are. [00:07:57][48.8]

Alec: [00:07:57] Let's let's even start a step further back from that and understand the difference between stocks and bonds. We keep using our hypothetical equity in company. We'll continue doing that. We could have come up with a more creative example. [00:08:09][12.1]

Alec: [00:08:12] So as a company, we need money. [00:08:14][1.6]

Alec: [00:08:14] The way we want to do something with that money. And there's two ways you can get it. You can sell part of your company. And that was what we explained in the last episode, become, you know, go to the stock market. Or the other option is you can take a loan and you can essentially borrow money from someone, a bank person, whatever, and then pay that money back. And in a really simple sense, this stocks are companies that have sold part of the company to fund their operations equity. Yeah, I pay equity. Yes. And then bonds are when companies have decided rather than selling part of the company, they'll raise debt. So they'll get a loan and then they'll pay that loan back. And a bond is essentially a an IOU on a loan that you've given the company. So that, in a simple sense, is the two ways that companies fund their operations. Governments also raise bonds so governments raise debt to fund what they're doing. And then if you own a bond, you essentially have loaned money to the government or the company or whoever it is. Yeah, yeah. [00:09:20][66.0]

Bryce: [00:09:21] So Ren the previous episode we talked about ways of investing strategies, value, growth and momentum. Now those all really revolve around the asset class of stocks. Right. [00:09:33][12.1]

Alec: [00:09:33] To an extent, you could apply similar theories to other asset classes, but it's not as clear. Yeah. Yeah. [00:09:39][6.1]

Bryce: [00:09:40] And another thing to consider, I guess, is the makeup of these three sorts of assets in your portfolio, because some are more defensive than others. And at particular times in your life, they become more important because they, I guess, protect you against market cycles. Now, we don't need to go too much in the weeds with this. They all have different types of, I guess, properties when it comes to risk. [00:10:03][23.1]

Alec: [00:10:04] We obviously don't give advice, but why don't you talk about what's your split between those two between stocks and bonds? [00:10:10][5.9]

Bryce: [00:10:10] Yeah, at the moment, zero bonds. Really? Yeah. And then that is something that I'm considering at the moment, just primarily because of where I think we are at in the broader scheme of things. And also because I think accessing them up until now or recently has been a lot more challenging than accessing stocks. Very easy to go out and buy stocks, but also you really need to understand bonds and how they work. It's a lot easier to understand how stocks work. What about you and what's your split? [00:10:39][29.4]

Alec: [00:10:40] I've got about 10 percent in bonds. Okay. For what reason? Because it's a good diversification and diversification is just spreading your risk out across multiple asset. Yeah. So you not just like all in on one thing and that's hey, if that goes badly then you're screwed. Yeah. So for me, bonds add to that diversification. And it was a sort of a tippy toe in the water moment as well. [00:11:01][20.8]

Bryce: [00:11:01] Yeah, nice. I see what happens. So when I want to focus on stocks, stocks as we started, the upside is not just about buying into companies. Right. Stocks actually give you the opportunity to buy across many different types of asset classes through the stock market, which is probably one of the most powerful things about the stock market. Right. And I don't want to confuse things. I don't know if that was very clear, but if I want to invest in gold, I can do it through the stock market. If I wanna invest in and get access to property, I can do it through the stock market. If I want to get access to tech companies, I can do it through the stock market. If I want to get access to precious metals, I can do it through the stock market. Stock market is an excellent way of buying stake or share in a number of different asset classes. Stocks is, I guess, the overarching asset because at the end the day, it's all done through the stock market. Now I want to do one thing, Ren, and ask you the question, how do you actually make money from these assets? [00:11:54][53.4]

Alec: [00:11:55] I think we probably need to explain what you just said a little bit further. Okay. Yeah. Cause I think that that probably raises more questions than it does answers. Okay. Well, how about you ask me the question and I'll answer. So if stocks are a certain thing, if stocks are a particular asset, how can you buy all these other assets through the stock market? So, for example, if I want to buy into gold, there's a couple of ways that you can do that. [00:12:20][25.9]

Bryce: [00:12:21] You can buy into an index fund that tracks the price movement of gold and that will give me exposure to the price of gold, but not actually gold itself. Right. [00:12:30][9.8]

Alec: [00:12:31] All right. Can you just raise more questions by looking about index funds coming to that in another area? Certainly. [00:12:36][4.7]

Alec: [00:12:37] I think maybe the simplest way to say it is the standard stock is a company that runs their business. And then you buy part of the business, the equity mate's company that we keep trotting out. But there are also companies that exist purely to give us an opportunity to invest in these things. You're talking about bonds, commodity property. And so literally all the company will do is say, you give us money, we'll go and buy that. We'll go and buy gold with that money and do nothing else. Yeah. And so the value of us as a company is only related to gold because that's literally all we do. You give us 100 million dollars. We go buy 100 million dollars worth of gold. If the price of gold goes up, the value of our company goes up and you as a shareholder benefit from that. So essentially, they found ways to make these companies that look like companies and you buy them like companies. But how you actually make money is to what you were saying, those other asset class. [00:13:35][58.6]

Bryce: [00:13:36] Yeah, nice. So let's talk about making money. So I thought this whole series was about making it is. It is. But I'm I'm just thinking. So we've discussed, you know, that there's ways of, well, what we can invest in in terms of assets. But, you know, if Ben, we've spoken about the value of being a shareholder and buying into all these big companies, how do I actually make money from my investment if I'm going to be putting money into stocks or bonds? Like, where does the money come from? [00:14:00][24.5]

Alec: [00:14:01] Essentially, it comes from someone else buying it at a later date. So the price that we say on a stock market, bonds similarly priced and the way those prices are set are based on what investors are buying and selling at that moment. So if you look at a stock market, prices constantly moving, and that's just based on the most recent transaction of that share or of that bond. Yeah. And so as the stock price increases, that means that that asset is just being bought and sold at higher and higher prices. How you as an investor make money is by then joining, becoming one of those investors that sell that asset to someone who is willing to buy it at a higher price in the most part. That's how you make money from a stock, from bond. That's how you make money flipping houses. That's how you make money from gold. All that stuff, that's that's the fundamental basis of making money through investing. Buying something and holding it and then someone in the future buying it for more than you purchased it for. Now, the beauty of some of these investments is that there are other ways that you make money through the process. And essentially, bonds and shares will give you money as you go. Actually, property and will in Ren and stuff like that as well. So there's a number. But the two main wants to focus on for this investing podcast are shares as a as a company. They make money every year. Some of the profits that they make, they use to invest in their business, you know, to build a new factory, to hire more people, whatever it is. But some of that money is left over. And what they then do is they pay that to their investors, to their owners. And that's called a dividend. And a dividend is simply your share of the profits of that business. Similarly, bonds, you loan money to the company and they'll pay that back at a certain date. But in the meantime, they'll pay you interest on your loan. And that that's called yield. Yeah, nice. [00:16:03][122.4]

Bryce: [00:16:04] So reasonably straightforward. Now, there is no guarantee that that will always happen. There is no guarantee that when you buy a stock that someone else will want to buy it from you at a greater price down the track. No. But generally speaking, that's the hope of all investors. Yeah, well, that's why you invest. Yes. So it's pretty straightforward. Ren. Now, we've discussed money, stocks and bonds. And there are probably we've we've touched on property as being another, I guess, asset yet. And neither your I own property at the moment and I certainly don't foresee myself pouring money into it anytime soon. I'm not sure about yourself. No, not not anytime soon. Yes. So there are a number of reasons around that. But there's also another sort of asset that is pretty particular to not particular to Australia, but relevant to Australia. That's commodities, not crypto and crypto as well. Yes, I mean crypto. Interesting question. Do you see crypto as a medium for exchange or as a store? [00:17:00][56.5]

Alec: [00:17:01] This is a whole other podcast. I think it's too volatile to be a medium of exchange. [00:17:06][5.5]

Alec: [00:17:07] So if you think about why cash is really great in terms of using it in the economy, it's because its value doesn't fluctuate wildly from Monday to Tuesday to Wednesday. It you if you're buying a coffee for three dollars fifty on Monday, you're going to need the same amount of cash on Tuesday. Yeah, imagine trying to do that with Bitcoin all over the way. [00:17:25][18.2]

Alec: [00:17:26] So look, at some point in the future, if the fanatics are correct, there will be a point where Bitcoin is less volatile. And then it may be able to be alternative money supply. There's a lot of ifs and caveats in that. Yeah, but look, that's the theory that Bitcoin is used until then. Arguably, it's a good store of value unless it crashes again like it did. But yeah, that that's that's probably how I said. Yeah. [00:17:57][30.8]

Bryce: [00:17:57] Yeah, I agree. Yeah. I certainly don't see it as a medium for exchange. [00:18:00][3.0]

Alec: [00:18:01] There are companies that take bitcoin. Absolutely. [00:18:03][1.7]

Alec: [00:18:04] Obviously that dark web stuff that you do obviously takes get out of it. [00:18:08][4.3]

Alec: [00:18:09] But like, you know, companies are trying to be on try and. [00:18:12][2.9]

Bryce: [00:18:12] Yeah. Yeah, absolutely. But I definitely see it more as a store of value. And the way that it's spoken about in this, you know, the new circles that I read particularly, it's seen as a store of value. So and that's the way that I have exposure to it as well. Tiny exposure. But I certainly don't see it as something that I will be using to buy my next cup of coffee. I say is something that I'm hoping someone will buy from me at a later date. From what I bought it for, to buy an extra Landow, maybe. Yeah, exactly. So Ren, I think that's probably a good wrap before I interrupted you. [00:18:40][28.5]

Alec: [00:18:40] You're going to ask me about commodities. Well, I think you did ask. So true. Do you want it? Do you want to just put a ribbon on that and explain commodities? [00:18:46][5.7]

Bryce: [00:18:47] Commodities is probably your year for fifth, fourth or fifth or sixth asset time outside of the three main ones that we discussed. And I mentioned it being particular to Australia because that's where we're talking about, you know, those basic sort of coal, gold, silver, the precious metals. And you can go down the track of even wheat and beans and those sorts of things. So it's the I guess the real basics, I guess. I don't know how else you would explain it, Ren, but you can invest in those because obviously they have a price and that price fluctuates based on supply and demand of the product. And so some people, you know, oil being one of them, you know, it's a very popular investing vehicle. And people try and predicts the price of oil based on supply and demand, particularly coming out of OPEC and those sorts of countries that control the price. So you can invest in these what are called commodities. And I guess try and predict the prices just like stocks. [00:19:39][52.7]

Alec: [00:19:40] Essentially, the takeaway is anything that has a price you could invest in, because essentially all investing is is buying something with the hope of someone paying more for it in the future. You know, art is an investment where to make that border historic days. [00:19:58][17.4]

Alec: [00:19:59] Is. I'm not sure if he made money on that. [00:20:02][2.3]

Bryce: [00:20:03] That's always sold out by a surfboard or something. Sounds a bit ridiculous. [00:20:06][3.0]

Alec: [00:20:07] Surfboard could be an investment. If he thinks I was going to pay more for generally, I would say it probably doesn't. No. That's why New knew cause a terrible investment, because no one ever pays more for a used car than someone paid for a new car. Yeah, yeah, that was true. But that wasn't a great way of explaining. You get my point. So anything that's going to appreciate in value and someone will pay more for in the future could be an investment. Yeah. So the question that comes out of that, why is it that we focus on stocks? What is it about stocks that has made you think I'm going to do a podcast on that? Well, why don't you do a property, friends or crypto buddies or commodity pals? Why is it equity mates? [00:20:49][41.7]

Bryce: [00:20:49] Good question, Ren. I think there are a number of reasons that stocks are appealing. Firstly, access and the cost of investing in stocks for me is a big win. And yes, you can invest in commodities and the like at probably lower costs and investing property, but that's probably one of the main reasons. But also, I am just fascinated with investing in businesses. At the end of the day, I think it's much more appealing than trying to track the price of oil and understand why wheat and grain is going to be more expensive later on down the track. Likewise, property, I think there's not that much. You know, it doesn't really interest me as I understand it's a great investment at times, but I'm actually more fascinated in business itself. [00:21:28][38.4]

Bryce: [00:21:28] And this is just a way that I can really get hands on an involved investing in business and thinking about the way that the world works. What about you? [00:21:34][5.7]

Alec: [00:21:34] I think we touched on this in the very first episode of this. But I think it's now that we've explained some of these other asset classes, it's worth making the distinction. I think a lot of the other assets that we talk about, you rely on speculation. So, you know, we talked about the Ming veis or famous art or even gold, even property. [00:21:54][19.2]

Alec: [00:21:55] There's nothing intrinsically that is making them more valuable. The period from which you buy to the time that you plan to sell, nothing is happening there. That is making it more valuable. It is your speculating that someone is willing to pay more for it in the future. Now people are going to come at me and say, oh, well, with property you can renovate it. And sure, that is the exception. But in terms of the actual land, nothing is making it more valuable intrinsically. So what you're doing is you're speculating. You're speculating that gold will become more valuable. You're speculating that the art will become more valuable with stocks and to an extent, with bonds. There is something that's happening in that time that you're holding it that is making it more valuable. And that is the company is out there trying to hire the smartest people, trying to come up with new products, trying to sell more things, trying to open up new markets and to create more money to increase their value, to increase the amount of profit that they produce and then ultimately to become more valuable for its owners. And that's a distinction, I think. Because then what that allows us to do as investors is not try and think of what are other people going to think about these assets that we're speculating and what other people think and think about gold. But you can say, well, this company going to do like do we. Do we trust its business plan? Do we think it's going to succeed? And so it allows you to take another layer of analysis. And at the end of the day, you still rely on someone paying more than you paid. At the end of the day, you still need someone to be willing to do that. Yeah, but in that time that you're holding it, there's something happening that you don't get with some of those other assets. [00:23:31][96.1]

Bryce: [00:23:32] I completely agree. Great wrap there, Ren. I think, you know, hopefully we've been able to shed some light on some of the terminology that people are hearing out there, commodities and crypto and bonds and stocks and also help people. [00:23:43][11.9]

Bryce: [00:23:44] I think maybe think about what sort of asset interests them the most. If it is property, then this is probably not the podcast. [00:23:49][5.6]

Alec: [00:23:51] Yeah, but anyway, there is no again, there's no right answer. Like you should have multiple. I'm absolutely we would be done if we decided throughout our whole lives were never going to invest in property principle. It would just be done. They will make a lot of money on property. And so I think the point of this is stocks are a good place to start. But really, it's just about starting. And, you know, you're not going to find too many people who make a lot of money in investing. You're going to find have assets across all these asset classes. [00:24:20][28.8]

Bryce: [00:24:20] Absolutely. I think where they say that millionaires have at least five streams of income coming in. And this is one of the ways in which you can start building out those income streams. Nice Ren. Always good to chat stocks with you. I'm hoping that this has been another episode where we've broken down some barriers to investing and I think we are one step closer to finalising or wrapping up the steps needed to get on your journey. So, as always, looking forward to next episode. [00:24:48][27.3]

[00:24:50] Thanks for listening to get started investing. A production of acclimates media. Please remember that everything you hear and get started investing is general advice. [00:24:57][7.5]

[00:24:58] Only the content has been prepared without knowing your personal objectives, specific financial circumstances or goals. The host of Get Started Investing may maintain positions in the companies discussed before considering any investment. Please read the product disclosure statement and consider speaking to a licenced financial. [00:24:58][0.0]

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